European Commission calls on Chancellor to 'deploy appropriate measures'
against rising house prices

George Osborne’s flagship Help to Buy scheme must be reined in and council tax should be increased to stop house prices getting out of control, the European Commission has said.

In a dramatic intervention in UK Government policy, the commission called on the Chancellor to “deploy appropriate measures” because of rising house prices, particularly in London.

Mr Osborne should adjust the Help to Buy mortgage guarantee scheme and increase council tax on expensive properties, the commission said.

The suggestion that Help to Buy is fuelling a potentially damaging property boom will anger ministers and comes as David Cameron prepares to reform Britain’s relationship with the European Union before holding an in-out referendum in 2017.

Mr Cameron is also battling to prevent Jean-Claude Juncker, the former prime minister of Luxembourg, from being appointed as European Commission president when Jose Manuel Barroso’s term is over.

The proposals were outlined in a document designed to tell Europe’s five biggest economies how they can “make growth stronger, more sustainable and more inclusive”.

“The Commission recommends that the UK deploy appropriate measures to respond to the rapid increases in property prices, notably in London, for example by adjusting the Help to Buy 2 scheme and mitigating risks related to high mortgage indebtedness,” the report said.

The Coalition must take “action” to increase housing supply, the report said.

The report warns that rising property prices had not been matched by increases in council tax bands. It said that the owners some of Britain's most expensive properties are now paying relatively less council tax than the owners of cheaper properties.

“At the moment, increasing property values are not translated into higher property taxes as the property value roll has not been updated since 1991 and taxes on higher value property are lower than on lower value property in relative terms due to the regressivity of the current rates and bands within the council tax system,” it said.

Mr Osborne has been warned by economists that the Help to Buy scheme could lead to a housing bubble.

In the first six months of the scheme, which started in October, just over £1bn of mortgages were secured through the second phase of Help to Buy.

The UK is also told to “improve efforts” to cut youth employment and reduce child poverty.

The Government must also “improve the availability of affordable quality childcare”, the commission said.

It also criticises the government for not doing enough to encourage apprentices and warned that the qualifications system is too complex and "needs to be streamlined".

Mr Barroso said that “growth has returned” to Europe but said that the recommendations are being made because “the recovery is fragile”.

“We are not yet where we want to be, especially given record high levels of unemployment,” he said. “More effort will be required to lift Europe firmly out of the crisis and get back to solid growth.”

A Government source said: "The European Commission is right more effort is required across Europe to secure growth. That is why the UK will continue to work through our long term economic plan which is bringing down the deficit, creating jobs and controlling welfare and immigration.

"As one of the fastest growing economies in europe we always listen to the commission's recommendations with interest"

The source added: "Figures last week showed htb has helped thousands of first time buyers on steady incomes buy properties and finally realise the dream of home ownership. Its an aspirational policy that will remain a key part of our economic plan.

"But we are the first to say we must be vigilant which is why we specifically gave the bank of england powers to intervene in the housing market - they shd not hesitate to use them if they see fit."